God DAMN dude that's a Jargon-o-riffic mess. The truth is in like three sentences, which I will translate: "Interest rates on risky-ass inter-bank derivatives have gone up in the US and UK because the US and UK stopped throwing money at their markets to prop them up. Europe and Japan, on the other hand, are still stoking the fire." "Because the US passed reforms in 2008 to spoil our fun and keep us from being jackasses, our fun is being spoiled." "Because the US passed reforms in 2008 to spoil our fun and keep us from being jackasses, our fun is being spoiled." "When governments don't protect our ability to piss away money as if it wasn't ours, we're a lot less inclined to piss away money." "Even though banks can get free money, they aren't allowed to piss it away as if they don't own it because they're prohibited from playing the ponies with that money." "Because banks that risk money might lose money." And here's where things get batshit: This is an analyst at Citibank taking as an article of faith - as something that everyone agrees upon and holds to be unassailable truth - that the common, obvious cause of the financial crisis of 2008 wasn't actually the cause of the financial crisis of 2008. This is a bizarro-world argument, a "we found the WMD" argument, a "trees cause global warming" argument. _____________________________________________ This whole pathetic piece infuriates me. It's deliberately written in language to obscure its meaning from the 401k crowd. The goal is to mask simple, obvious statements from people who don't risk other peoples' money for a living so that they think there's some sort of mystery to it all. This is what happens when you give business majors the keys to the kingdom: if they can't defend what they're doing in plain language, they tart it up in overwrought sentences that would make a Byzantine monk pull his hair out. "What in the name of leveraged ratios is going on?" You fuckers stacked up a bunch of bad investments because you couldn't resist the interest rates and those investments turned out to be bad. Now you're losing money. SUCK IT. “the negative repercussions for secondary market liquidity of regulatory tightening were being offset by the abundance of liquidity injected by central banks. It seems very likely that much of the reason the swap spread and cash-CDS basis moves have been more pronounced in $ and £ than in € and ¥… is because of the move away from stimulus in the first two currencies and its continuation in the latter two.”
If mutual fund outflows continue or even accelerate, these dislocations are likely to become larger still. With dealers’ (and hedge funds’) previous ability to act as at least a temporary buffer having been all but completely curtailed by a combination of the Volcker Rule, leverage ratio, and repo constraints, markets feel much more one-sided than previously.
If investors cannot rely upon relationships which previously mean-reverted in a regular fashion, not only will they be more cautious about intervening when dislocations occur; they must try pre-emptively to guard their portfolios against such dislocations in the first place.
Instead, it is something more pernicious: an erosion of the confidence issuers and investors alike can have in the durability of the market levels they see on screen. When traditional relative value frameworks fail to hold, and when dislocations can appear out of nowhere and then, just as abruptly, disappear to nowhere, it is likely to make everyone more risk-averse – not only in their investments in markets, but also in their activity in the real economy. There is evidence that it is the fear of drops in asset prices, not the fear of deflation per se, which is damaging to growth.
Increased central bank liquidity programmes may help at the margin to deal with these dislocations, but are unlikely to eliminate them. The problem here is not that banks cannot obtain funding; it is that they are constrained from running prop positions themselves, no matter how interesting they find the potential valuations, and constrained in their ability to provide leverage to others. Even in €, the cash-CDS basis and skew on credit indices has reached post-crisis records against a backdrop of continuing unlimited ECB liquidity.
His overall, rather grim point, is that constraints on leverage and repo were meant to have made the system safer… and they haven’t.
If the pre-crisis problem was not CDOs in and of themselves, or excessive bank lending and leverage, it must have been something else.
I meant to add some text up top, but posted this on mobile without time to do so. I agree with your assessment. It is purposefully opaque. The part you highlighted, and the rest of last quoted paragraph was what I thought was most interesting: He concludes that it is easy monetary policy that is to blame, because look how fucked up things were in 2008, and how they are fucked up now, even though regulation tried to limit some types of gambling after the last crash. IMO he is right in one sense, and dead wrong in another. Easy money helps this happen. There exists an unholy relationship between the several investment banks in the world, and the Central Banks that ostensibly try to give us a healthy economy through incentivising them. It's a fool's errand. Investment banks will gamble with the money they are given, and if they don't like the instruments they have at their disposal they will create ones that suit them. "CDOs, excessive banking and leverage" were exactly what fucked over the world economy in 2008. Sure, you can say that it was the Central Banks bankrolling the operation that were to blame, but then you can also blame the repeal of Glass–Steagall that created the whole casino operation. The problem is that investment banks do some investing, but do a whole lot more betting on investments, and betting on those bets, and upon those bets... Easing money from Central Banks cannot get passed the vacuum of the derivatives markets. This is just gambling. Until the derivatives market is deflated to be less than the value of the market it is based upon, the tail is going to wag the dog. The Japanese economy contracted 1.4%, and the Nikkei rallied 7% yesterday. That is because shit data means the junkie is going to get another dose.If the pre-crisis problem was not CDOs in and of themselves, or excessive bank lending and leverage, it must have been something else. The most obvious candidate is overly easy monetary policy stimulating unsustainable credit expansion and ultimately asset price bubbles. Banks were certainly an instrument through which this policy was enacted, but financial leverage itself – especially that behind relatively low-risk arbitrages within financial markets – was a very limited part of it. Had leverage not been available, easy money would have taken effect some other way, either by spreading to other banking systems which were less constrained, or through stimulating an expansion of credit via bond markets instead. The years since the crisis have of course seen both.